I do not see the economic behaviour of real Muslims as being materially different from that of real non-Muslims.

22 October 2016

When presenting on Islamic finance, I often make the statement that "Islamic banking is banking which is carried out in compliance with rules laid down by Shariah scholars."

The statement makes a strong point.

It implicitly asserts that Islamic banking and conventional banking both seek to meet the same needs of providers and users of finance. The operational differences between conventional and Islamic banking then simply arise from the requirements laid down by Shariah scholars.

Proponents of Islamic economics have a different aspiration. They envisage Islamic finance being at the heart of an Islamic economic system which is fundamentally different from the economic system of free market economies such as those of OECD countries, or indeed of socialist economies such as those of the former USSR, and the People's Republic of China before the reforms that began with Deng Xiaoping.

For a short (103 pages) introduction to Islamic economics, I recommend downloading the free paper "Islamic Economics: A Survey of the Literature" by Asad Zaman of the International Institute of Islamic Economics, International Islamic University, Islamabad, Pakistan.

Personally, I am as sceptical about Islamic economics as I would be about Islamic physics. In my view, economics is the study of real world economic behaviour, and I do not see the economic behaviour of Muslims being materially different from the economic behaviour of non-Muslims.

I made these points within the limitations of 600 words in my October monthly column in the magazine "Islamic Finance News." You can read it below.

Letter from Amin - 12 October 2016

Homo economicus, man as portrayed in classical economics, is very easy to mock. Coldly acting in his self-interest, he computes potential future outcomes, assesses trade-offs rationally and if a consumer maximises his utility, or if a producer maximises his profits.

In the real world, homo economicus is nowhere to be found. Most people give something to charity; homo economicus never would. Indeed, many billionaires plan to leave almost all of their estate to charity.

More importantly, research in the relatively new field of behavioural economics has shown how people regularly and consistently make economic decisions which are clearly irrational. The kind of decisions homo economicus would never make.

So if homo economicus does not exist in the real world, why does he continue to survive in the theoretical world?

In my view the answer arises from the need to build theoretical models of economic behaviour. The actors in economic models are both humans (individuals) and also nonhumans (companies and governments). However, even the nonhuman actors are, of course, led by groups of individuals who are the decision makers. Accordingly, economic models require assumptions about how humans will make economic decisions.

By far the easiest economic decision maker to model is homo economicus. That is one of the key reasons why classical economic theory is built around him. Real humans of the kind we encounter in behavioural economics are much more difficult to model. The peculiarity is that most of the time, relatively simple models built around homo economicus give rise to predictions which match real world economic behaviour to a reasonable degree of accuracy.

To give an everyday example, almost all people have some degree of unselfishness. However, if you assume that all of the time people will act selfishly (as homo economicus would), you will not go far wrong.

Homo economicus is of course a problem for all religious people. All of the major religions, and certainly the ones I know best (Islam, Christianity and Judaism) teach us to be unselfish, to care for others, to care about humanity rather than focusing upon our own narrow self-interest. To put it at its bluntest, if homo economicus was a real person, he would stand very little chance of going to heaven!

Proponents of Islamic economics have recommended replacing homo economicus with homo Islamicus. He is a man who behaves as Muslims should, unselfish, caring about others as much as he cares about himself, and conscious of the needs of all future generations yet unborn, not just his own descendants. Homo Islamicus is then used to build Islamic economic models.

The key question we are left with is which models more accurately predict how Muslim economic actors (Muslim individuals, Muslim led companies and Muslim led governments) operate in the real world? Is it economic models based on homo economicus or those based on homo Islamicus?

Without attempting any kind of formal survey, my belief is that it is the economic models based on homo economicus which more accurately predict the behaviour of real Muslims in the real world.

Where that leaves Islamic economics is beyond the scope of a short letter!

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